Anatomy of a Construction Contract

The function of a contract is to reflect the intentions of the parties.  In construction, the shared intention is to construct a specific project, within a defined time frame, at an agreed price, and in a prescribed manner.  If the contract is well-drafted, the parties have a good start toward a successful project.  The contract will tell the parties what their respective rights and obligations are, as well as the consequences on not fulfilling their obligations.  It is important to recognize that, unlike in old England, there is no debtor's prison in the American system of jurisprudence, and the remedy for non-performance may often be too little too late.  Good contracts can help minimize unintended consequences.  Good construction contracts have their own anatomy in the form of eight fundamental categories of clauses.  Understanding the categorical nature of any particular clause can help determine the relation of that clause to the contract as a whole and thus foster better negotiation, drafting and administration of construction contracts.  

Housekeeping.  Every contract must properly and completely identify the parties, the project and the contract documents.  This includes full corporate names and addresses, and a formal property description for the project.  If there are other material participants, such as the designer and the owner, it is useful to include them as well.  It is also imperative that all of the contract documents be identified with specificity.  Contract documents include the construction agreement itself, but they may also include separate general and special conditions, construction drawings, specifications, addenda, project manuals, soils reports, etc.  If such documents are identified as part of the "contract documents," they become part of the construction agreement that governs the parties' respective rights, obligations and liabilities, and they must be reviewed for consistency and applicability.  Contracts should also include a signature section evidencing assent to the agreement.  Make sure the contracts get signed, preferably before commencement of the work.  There is no need to inject spurious issues into future disputes such as whether a party is bound by a contract for lack of signatures.

Scope of Work.  A construction contract is not complete if it doesn't fully specify the scope of work to be performed by the contractor.  For most projects, the scope of work is described in construction drawings and specifications and these must be identified in detail in the construction contract.

Contract Price.  The Contract Price is another key component of the construction contract and must be stated without ambiguity.  If it is not, ultimately a judge or an arbitrator will be required to decide the reasonable value of the work performed, and at a much later time than completion of the project.  The contract price will, of course, depend on the project delivery method.  The most common forms are fixed price and cost-plus, with or without a guaranteed maximum price.  These forms of pricing can, in turn, be affected by whether the contract is for just construction, for design build, or for some form of construction management.

Schedule for Performance and Completion.  A large number of construction disputes arise out of scheduling.  The more clearly the parties can identify the construction schedule in a contract, the lower the risk of protracted disputes later on.  A schedule can be in the simple form of a start date and a completion date or, on more complicated projects, bar charts or full-blown critical path method project schedules.

Allocation of Risk.  There is always uncertainty in construction projects and, with that uncertainty, risk.  The risk can, and often does, translate to liability for unforeseen costs.  Good construction contracts provide for those risks by inclusion of clauses addressing matters such as differing site conditions, non-payment, injury to person or property, warranty and claims by others.  The purpose of such clauses is to reflect the parties' agreement at the beginning of the project as to who bears the risk of liability in the event that unforeseen events transpire that create liability and impose additional costs on the project or the parties.  If these provisions are not included, it becomes necessary for a court or arbitrator, much later on, to decide how the applicable law distributes that risk.  Insurance is an important aspect of risk allocation and a necessary component of every construction project.  Experience has shown that the best allocation of a particular risk is to the party best situated to manage that risk.

Contract Administration and Logistics.  This category of clauses addresses contract and project administration matters, and includes more ministerial aspects of the project such as payment procedures and reporting.  While perhaps stating the obvious, in addition to good contracts, good project documentation is essential to optimal project administration, and it is critical to resolving disputes favorably.  

Dispute Resolution.  If a dispute arises over performance obligations under a construction contract, and the contract does not provide for any dispute resolution procedures, the claimant’s recourse is in the courts.  Litigation is expensive and time-consuming, however.  Thus, contracting parties will often call for alternate dispute resolution (“ADR”) procedures which are intended to provide in theory at least, for quicker, more cost-effective resolution of disputes.   A common ADR procedure is mediation in which a trained neutral conducts a structured settlement conference between or among the parties with the intention of reaching a voluntary and acceptable settlement by the parties.  The mediator has no authority to make decisions that are binding on the parties.  Nevertheless, if the contract calls for “mandatory mediation,” the parties are required to participate in mediation in good faith, even if they don’t agree to settle in mediation. 

The major ADR procedure utilized in the construction industry is arbitration.  An arbitration procedure is binding on the parties, effectively substituting for most of the court’s responsibilities.  Arbitration statutorily divests the courts of jurisdiction over most aspects of a contractual dispute under the contract with an arbitration clause.  Radil v. National Union Fire Ins. Co. of Pittsburg, PA, 233 P.3d 688 (Colo. 2010).  The Colorado Uniform Arbitration Act, C.R.S. §§ 13-22-201, et seq., can be preempted by an enforceable arbitration clause that invokes the Federal Arbitration Act, 9 U.S.C. §§ 1, et seq.  An arbitration proceeding is typically similar to a judicial proceeding, but often without all of the procedural elements in conventional litigation such as depositions and written discovery.  In either form of ADR, the parties pay equally for the fees of the mediator and/or the arbitrator.

Warranties.  Warranties impose an obligation to repair defective work, and they can be express, as in stated in the contract, or implied where the law will impose a duty irrespective of the contract.  An express warranty is legally separate obligation from the duty to perform under the construction contract even though a warranty may be recited in that contract.  Hersh Companies Inc. v. Highline Village Associates, 30 P.3d 221, 225 (Colo. 2001).  “[Warranty] claims seek recovery for the breach of a subsequent contractual duty to repair or replace rather than recovery for a deficiency in the original work, they do not fall within the class of actions governed by [the limitations of actions statute for construction professionals].”). 

For more information on construction contracts, contact Ken Robinson or another member of our Construction Law & Litigation team.